AAII Sentiment Survey: Pessimism Above 40% for First Time Since 2017

Pessimism among individual investors about the short-term direction of the stock market is at its highest level in more than year. The latest AAII Sentiment Survey also shows declines in optimism and neutral sentiment.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 5.8 percentage points to 26.1%. Optimism was last lower on August 31, 2017 (25.0%). Bullish sentiment is below its historical average of 38.5% for the seventh consecutive week and the eighth time in 10 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 0.3 percentage points to 31.2%. This is a two-month low. Even with the decline, neutral sentiment remains above its historical average of 31.0% for the eighth consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, jumped by 6.1 percentage points to 42.8%. Pessimism was last higher on March 9, 2017 (46.5%). Bearish sentiment is above its historical average of 30.5% for the third consecutive week.

Bearish sentiment is now at an unusually high level (more than one standard deviation above average). Bullish sentiment, conversely, is now at an unusually low level. Unusually low levels of optimism have been historically followed by above-average and above-median six- and 12-month returns for the S&P 500 index. Unusually high levels of pessimism have historically been followed by above-median, but not above-average, six- and 12-month returns for the S&P 500.

Many individual investors are anticipating continued volatility and/or think that the current political backdrop could have a further impact on the stock market. Trade policy is influencing some individual investors’ sentiment, but not all. While many individual investors either approve of the recent interest rate hike or don’t expect it to affect the stock market, some are concerned about the impact that rising rates will have. Also influencing sentiment are valuations, tax cuts, earnings and economic growth.